Global Megatrends: The accelerating shift of power from West to East

China General Interest

An era of uncertainty

The world is changing more rapidly than ever. Globalization continues its march. Gaps in power between developed and emerging countries continue to narrow, driven in part by the politics and economics of energy. The financial landscape is in turmoil, driving increased regulation. Aging populations and the different demands of the younger generation (Gen Y) challenge the workforce model that has existed for decades. Technology continues to alter how we communicate and act. And climate change concerns challenge how businesses operate.

Below is an excerpt from a global report by Ernst & Young (Global Megatrends 2009) released in February 2009. It represents an Ernst & Young perspective of some of the most significant trends seen in the marketplace. The report offers a snapshot of the main themes and concepts within each trend: a concise view to raise questions and spark new ideas, rather than a comprehensive set of answers. These megatrends were written at a time of particular flux: globally we were in the midst of a financial crisis and there was (and still is) a considerable amount of uncertainty about the future. Despite this unstable environment, we still need to think about the trends that were unfolding before the crisis — questioning how they will evolve and what new directions they might follow — as well as considering new trends that are emerging:

The accelerating shift of power from West to East

The rebalancing of power

The global economic landscape is changing, and the emerging markets are playing an increasingly significant role. Economic power is moving from developed to emerging economies — from West to East and North to South. Emerging economies accounted for 44% of global GDP in 2007; while projected GDP growth rates for major developed markets in 2009 are now predicted to lie between -0.2% and 0.5%, emerging markets are expected to grow at 6.1% on average, with China (9.3%) and India (6.9%) performing even better. This may be less than was projected before the financial crisis, but emerging markets still demonstrate considerably stronger growth than the developed world. The financial crisis may have undermined decoupling theories, with emerging markets also suffering from issues of liquidity, investor confidence and over-valued assets, but their hunger for growth (alongside their rapidly industrializing economies and growing populations) should set them on the path to recovery more quickly. In China and Russia’s case, their huge accumulated reserves (China with US$1.9 trillion and Russia with US$560 billion) will no doubt ease the pain.

Beyond the BRICs

While the BRICs (Brazil, Russia, India, China) are clearly the major players (with China alone contributing nearly 27% to global growth in 2007), another group of countries are emerging that have the potential to behave like the BRICs — driving growth and making waves in the global markets. South Korea, Mexico and Turkey may be the most commonly cited of Goldman Sachs’ “Next 11” but countries as diverse as Egypt, Iran and Vietnam have been identified as having the potential and conditions to rival the BRICs — and some developed economies — in the future.

The Middle-Eastern economies are likely to be another real growth story of the next few years — although they have not been immune to the immediate effects of the financial crisis, with issues around interbank lending and overinflated property prices causing some concern. They remain well placed, however, to capitalize on difficulties elsewhere. Even at US$50 per barrel, the Gulf Cooperation Council (GCC) states would earn a cumulative US$4.7 trillion by 2020, or 2.5 times their earnings over the last 14 years. This will afford them huge opportunities to buy up cheap assets or finance local infrastructure developments as the rest of the world’s economies stall. Their relatively lax regulation and lenient tax regimes will be even bigger attractions as European and US business environments tighten under the pressure of the recession.

Africa has also been stepping onto the global financial stage. Its economy has been growing at 5.4%8 over the last decade and it has been a major recipient of investment and interest; Chinese enterprises invested over US$300 million in Africa in the first 6 months of 2008 alone9, and interest in its natural resources has been the source of much political tension. However, the uneven distribution of investment (60.5% of total net foreign direct investment in sub-Saharan Africa in 2005 went to oil-exporting countries) and the large number of conflict-prone and resource-poor countries will likely keep much of Africa in the shadows of the BRICs for some time yet.

Emerging market multinationals (MNCs), previously little known outside of their own countries or regions (despite their colossal size), are now challenging the megacorps of the West.

Emergence of a new middle class

Alongside the advantages conferred on many of the major emerging economies by rich supplies of commodities, political and demographic changes have played a large part in driving their growth. The fall of communism (or adoption of government led capitalism) has opened up the world, resulting in a tenfold increase in the number of people served by the world economy in the last 25 years. The sheer scale of population growth in the emerging markets will also drive their economic development and relative strength; while the global population is predicted to reach 8.3 billion by 2030, from 6.7 billion today, only 3% of this growth will occur in the West. The mushrooming of the middle classes in emerging markets is a critical factor: since 2000, 600 million people have reached middle class status, spending on average US$4 trillion a year13 and an estimated 70 million further people will join their global ranks annually.

The emerging global champions

Serving the needs of these people — and millions more around the world — are the emerging market multinationals (MNCs); companies previously little known outside of their own countries or regions (despite their colossal size) are now challenging the megacorps of the West. Globalization may just have been, in the past, a different word for westernization, but no longer — a new wave of globalization is in place, and emerging market MNCs are now exporting their brand of capitalism to the West. Tata, China Mobile and Gazprom are now familiar names and behind them are numerous other companies looking to secure their place on the global stage.

Their rise has been swift: emerging markets had 70 companies in the Fortune Global 500 in 2007, up from 20 just a decade ago, and are likely to account for a third of the entire list within 10 years. It has also been impactful, evidenced by some very high profile activities across numerous sectors:

Lenovo, Mittal and Cemex becoming household names for their acquisition activities with IBM, Arcelor and RMC respectively; Wipro and Infosys challenging the dominant IT outsourcing providers; Embraer challenging Boeing’s and Airbus’ dominance in certain segments; and TNK-BP and Gazprom showing their financial and political strength. These companies may have a competitive advantage over their western counterparts in reaching into other emerging markets, but they have not been afraid to compete in developed markets, too, increasingly challenging western MNCs for market share, capital and business activity on their home territory.

These companies share few traits: they’re positioned across wide-ranging sectors; they have radically different governance structures (from each other, as well as from traditional western MNCs, ranging from state- or family-owned conglomerates to narrowly focused corporations); and they approach expansion in varying ways. However, they have growing clout and influence in common, as well as two other common features: they have confidence and they have scale; the ten largest emerging market companies had combined revenues just shy of US$1 trillion in 2008 — more than the entire GDP of Australia or The Netherlands.